Every economist looks towards a perfect market to model theories on. The market is free but also extremely competitive. What ends up happening is that the price equals to the marginal cost. Competing demands of the consumer pull producers to respond. New start-ups will see the demand and respond they will borrow from the bank and interest rates will rise or fall depending on the balance of people wanting to borrow or save. This is an example of the way this trading within a perfect market ripples; these ripples continue outwards and can effect education and technology. E.g. more transparency and competitiveness leads to more trading meaning more trained workers meaning people will have the incentive to go to college and become trained because there is a demand for training. The reason for this is within a perfect market consumers have absolute power, no one firm controls the market in anyway including price. Within a perfect market companies are producing the right things in the right way, the most efficient because in this market if it isn’t totally efficient the company will go out of business. They are producing the right things because the price is a direct line of communication from what products cost to what customers prefer and back again. Things are then also made in the correct proportions and going to the ‘right’ people. Henceforth you cannot get more efficient than a perfect market. The use of a single currency effectively creates a single market and because with the Euro this is so large this means high competitiveness, and because they are all working under the same restraints it leads us towards this ‘almost’ perfect market. This creates economic strength and growth. Something that any country including the UK would benefit from. Also this is brought about through no barriers between countries in the block.
This block is enormous and all within the same set of rules this would encourage economies of scale meaning even more efficiency and henceforth benefits for the consumer. Because the firms would be working on a big enough scale to drive down cost hence increasing efficiency. Then the availability of choice of raw materials also counts towards a more competitive market because resources are a lot less scarce in this single market driving down prices. Also on the labour front the productivity in the euro zone is 20% higher than the UK. This also means greater competitiveness in world markets which would seem to be the largest objective.
All these factors lead to arguably most important factor and that is the increased foreign investment. Singular European countries would not have been a significant player competing against the US, China, India etc. However as a single market they attract investment from these countries because of the Euro zone’s competitive market and sheer size. For a Japanese car firm to base itself within the Euro zone it is reaching far more potential customers than locating somewhere else.
All these issues are strong benefits for the UK to join the Euro zone – economic growth and hence a better standard of living, increased strength in world markets and cost savings when trading within Europe. To have a truly single market you have to have a single currency like the US. We have to face up to the fact we are becoming weaker in the world market since 1999.
Firstly and probably one of the greatest barriers for the Uk to not enter into the Euro zone is that within this zone the interest rate is set by the European Central Bank. We would lose control of our own monetary policy. Monetary policy has a multiplier effect on business and the economy. During a recession growth can be encouraged by allowing demand to increase. Low interest rates encourage investment and consumer spending, tax cuts give people more spending power, and government spending has a multiplier affect throughout the economy. And so through keeping interest rates down, reducing taxes and increasing government spending has this effect. The famous saying ‘one size interest rates does not fit all’ This would lead to a loss of flexibility and hence if our government created a problem within the country or an international economic problem it would not be easy to work around it through monetary policy. Also the fact that our economy is in a very different state to those within the Euro zone we would create for ourselves a short term problem with inflation.
Another factor is the fact that the difference between the richest countries and the poorest countries is a large gap. Through joining the euro zone we would be taking on the liabilities of those countries. For example the Euro zone as a whole has a large pension liability which technically would then become a burden on our economy. The concept still stands that you are reduced to the lowest denominator. Would the UK be dragged down by countries such as Romania? Is Europe a failing economy?
Also the labour market, I have argued earlier that Euro zone is striving towards a perfect market. However not in all areas. The problem within the Euro zone is that the rate of migration between the countries is very low; this is due to cultural and linguistic differences, unlike the US. In theory unemployment should be very low because of such a competitive market workers would move freely between countries however this is unrealistic in this situation. Hence unemployment in the Euro zone is at 8% whereas ours is at 5%.
Some people would argue that Britain’s largest economical asset would be the City. Could we afford to lose control of this. If we were to oin the Euro zone not only would control over interest rates be sacrificed but also control over bonds, mergers, acquisitions and forex trading. This is a large part of our GDP. We have more financial traders working in the City than the population of Frankfurt. To relinquish control would effect our prosperity. However many experts in the field also counter this with the fact that the reason for our success in this area is because of our link with Europe, that link that ensures ‘stability’, if we were to destroy hopes that sometime in the future we would join the Euro zone this success may cease. However you cannot escape the skills, expertise and prosperity that has built up in this area, Euro or not.
Many critics use the arguments of our financial structure to detract from joining the Euro our interest rates do fluctuate a lot more than that in the Euro zone. However this isn’t really a sound argument seeing as 12 very different countries have joined and although some like Germany have incurred teething problems there are no long term disadvantages.
